Algeria to capitalise on EU-Russia rift

On July 19, Algeria’s state energy company Sonatrach finalized a $100bn five year investment plan designed to considerably increase the country’s capacity to produce and export energy.

The plans feature more than $22bn of investment in the country’s natural gas industry, which will include the development of six new gas fields, along with another $20bn for the production of oil. The distribution of the rest of the total has yet to be decided.

The expansion plans comes as Sonatrach – the largest energy company in Africa – announces it has reshuffled its C-suite management. Previous CEO Abdelhamid Zerguine has been replaced by the company’s former vice president for production Said Sahnoun. The change is believed to have come at the behest of energy minister Youcef Yousfi himself, according to This is Africa sources within international energy companies operating in Algeria.

Algeria has the fourth largest oil reserves in Africa, and the second-largest gas reserves. Hydrocarbons constitute about 60 percent of the country’s budget revenues, and more than 95 percent of exports.

However, the sector has been struggling. Declining production has combined with rising domestic demand for energy to seriously hit the state’s key source of revenue. Oil and gas output dropped by 7.5 percent in 2013, wiping out $5bn in value. Export revenues have also shrunk. Algeria earned just $63.8bn in hydrocarbon exports in 2013, down from $69.8bn in the previous year.

The government is now preparing to take bids next month from foreign companies for 31 new oil and gas fields in order to counter the decline. Some hydrocarbon industry deals are beginning to come to light.

At the US-Africa Summit on August 5, General Electric CEO Jeffrey Immelt met with Prime Minister Abdelmalek Sellal to discuss the country’s operations in Algeria. The pair also announced orders for eight gas generators, and a gas engine project.

GE has a well established presence in Algeria. Its technologies generate almost 70 percent of the country’s electricity, according to Rania Rostom, the company’s chief communications officer for the Middle East and North Africa.

“We are committed to being Algeria’s growth partner by supporting the development of the country’s energy infrastructure,” said Lorraine Bolsinger, CEO of GE’s distributed power division.

In March, GE signed a $400m deal with Sonelgaz, Algeria’s state-owned electricity and natural gas distributor, to build a new gas complex in the eastern province of Batna. On June 25 Sonatrach also signed a major deal worth more than $600m with India’s Dodsal for a gas facility near the eastern town of Hassi Messaoud.

The government also plans to start developing the country’s less conventional energy sources, namely the country’s vast untapped shale reserves. Algeria is believed to be home to the third largest shale gas reserves in the world, and Sonatrach will begin drilling at four shale gas wells this year.

The British company Clarke Energy, which operates in Algeria, told This is Africa that it signed two deals for efficient power plants in Algeria earlier this month – and that it was looking to do more.

“There is massive potential in the country for the use of flare gas for power generation – that is, gases that are normally, flared as waste products when companies are extracting crude oil,” said Clarke’s marketing and compliance manager, Alex Marshall.

“We would like to build upon our other successful flare gas projects in Africa such as the Waha plant in Tunisia,” he said.

Renewing exports

With the retail price for natural gas fixed (now below cost price) since 2005, Algeria has the second cheapest domestic prices for natural gas in Africa, according to the IMF.

This means a large share of hydrocarbon production is satisfying Algerians’ demand for energy. The government’s plans to boost production and expand renewables is not targeting domestic markets, but geared towards attracting large export contracts.

“The programme aims to install a capacity of 12,000 megawatts of renewable energy by 2030 with the installation of 20 new photovoltaic plants in Algeria by the end of 2014,” says Professor Noureddine Yassaa, director of Algeria’s state Renewable Energy Development Center (CDER).

“As the biggest country in Africa and in the Mediterranean basin, we have huge potential renewable energy resources, especially in solar energy, and all the conditions are met for Algeria to be leading on renewable energy in the region,” Professor Yassaa says.

The government has also introduced a feed-in tariff scheme for photovoltaic solar power, which will last for the next 20 years. The tariff offers compensation to renewable energy producers – effectively subsidising renewable energy production.

Foreign investors have begun to take interest. On June 12, the German company Group Eurosol signed a preliminary agreement in Algiers with Algeria’s Aurès Solaire for a stake in developing new photovoltaic plants.

Supplying Europe

In light of the current diplomatic crisis between Russia and the European Union over Ukraine, European Commission planners are considering alternative forms of supply to substitute for Russian imports. This is a window of opportunity for Algeria, which already supplies around 70 percent of its crude oil exports and 80 percent of its gas exports to Europe.

Algerian officials have met frequently with European representatives to discuss its energy supplies to Europe. On June 5, negotiations were held with Greece on importing Algerian gas to market in Romania and Bulgaria. On June 16, the mayor of London, Boris Johnson, visited Algiers to promote British business interests in Algeria’s energy industry.

And on June 25, the Italian industry minister Federica Guidi met with Prime Minister Sellal to discuss expanding Italy’s energy relationship with Algeria. Italy derives around 40 percent of its energy from natural gas, and is increasingly concerned about the security of its Russian supply.

In Algiers, Ms Guidi said her visit – the first by an Italian minister since 2012  – was a chance “to confirm the strategic importance Italy attaches to Algeria, especially as regards oil and gas supplies”.

According to CDER’s Professor Yassaa,  Europe’s desire to diversify away from Russia “is extremely important given the proximity of Algeria to Europe,and the huge Algerian potential for a partnership which is sustainable and long lasting”.

“The current crisis in Ukraine has propelled questions of Algerian supplies to the centre of  EU–Russian tensions. With Russian supplies in question, EU member states are looking to Algeria as a possible substitute,” writes Mansouria Mokhefi, special advisor for the Middle East and North Africa to the French Institute of International Relations.

Ms Mokhefi argues that though the ossification at the heart of Algeria’s political system is problematic, there are prospects for a closer energy relationship between the EU and Algeria

“European leaders are looking to Algeria as the most reliable alternative source of energy for the EU, and have engaged in conversations with the Algerian leadership to increase their energy co-operation.”

 

This article was originally published with Financial Times: This is Africa on August 12 2014.

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About Tom Stevenson
Tom Stevenson is an Independent North Africa reporter

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